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As Eurozone Unemployment Climbs Will ECB Have to Ease Further?

Last updated 2/27/2009 6:50 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Eurozone unemployment  for January increased by 256,000 claims taking the overall rate to 8.2% from  8.1% the month prior as the global recession continues to impact the 16 member economic union.  While job losses in the region are still only half as large on a monthly basis as those in the US, the EZ has already lost  1.5 million jobs over the past four months and the trend is likely to accelerate as 2009 progresses.

Labor conditions in Europe have proven to be remarkably resilient in the face of the global credit crunch that swept financial markets last year, allowing the ECB to toe a much tougher line regarding rates than the rest of the G7 members.  While rates in US, Japan and (given the expected cut in UK) rest at within 50 basis points of  zero,  the rates in Europe have remained at 2% with ECB  likely to lower them only another 50bp at the upcoming meeting in March.

ECB President Jean Claude Trichet has expressly dismissed the notion of moving European rates towards ZIRP (Zero  Interest Rate Policy) but given the deteriorating labor conditions in the Eurozone he may have no choice.  Up to now European companies have resisted major job  cuts, with German employment statistics actually remaining positive until two months ago.  However, given the regions reliance on exports for growth, the prospect of further job losses looms large as global demand show no signs of improving forcing European manufactures to reduce payrolls further.

We have long argued that ECB’s vaunted hawkishness would crumble once EZ unemployment rates started  to increase rapidly. As employment conditions in the region begin to worsen substantially  the political pressure on the ECB to ease will become immense, forcing ECB policymakers  to cut much more aggressively  in 50bp increments rather than their preferred gradualist approach of 25bp cuts. Given the current employment trends in the region, it is likely that European rates will hit 1% by this summer and if unemployment data in the region approaches 10% level rates could dip to 50bp putting  Europe on par with the rest of G7 an near ZIRP like conditions by year end. 

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.